The Bank of Canada has come under a rare attack from critics after it misjudged inflation and locked itself into rigid forward guidance that prevented it from reacting quickly as prices soared and the Canadian economy was beginning to overheat.
One of the world’s leading central banks, it is now forced to play catch-up, raising interest rates more aggressively than expected just as Canadian household debt levels hit new highs, far exceeding those other G7 countries.
With a possible recession looming, the bank is facing questions from politicians, economists and even the general public about the opacity of its decision-making process and renewed calls for it to publish minutes, a common practice among many of his peers.
For its part, the Bank of Canada has admitted missteps and promises more transparency, including an analysis of inflation forecast errors, expected in July.
But he still faces near-daily attacks from politician Pierre Poilievre, the frontrunner of the opposition Conservative Party, who regularly takes to social media to accuse the central bank of being both incompetent and a puppet of the government. .
He also pledged to fire Governor Tiff Macklem if elected, a move that would require changing the law but nonetheless underscores the level of discontent.
“Is there still room for more transparency? Most likely. It’s something we’re thinking about right now,” Senior Deputy Governor Carolyn Rogers told Reuters in an interview this month. “It’s something we think about a lot. »
The Bank of Canada, which is independent in setting policy, has not faced this level of political heat since the early 1990s, when then-Liberal opposition leader Jean Chrétien railed against Governor John Crow over his policy of high interest rates.
Poilievre, who is not yet leader of the opposition, is unlikely to become prime minister until 2025, when the next election is held. But his attacks come at a time when public confidence in the central bank’s ability to curb inflation is vital to the economy.
The Bank of Canada, like many other central banks, deemed inflation to be “temporary” or “transitional” until the fall of 2021 and only started raising rates in March 2022, when inflation was already more than double the 2% target.
Prices are now rising to levels not seen since 1983, hitting 7.7% in May and above target for 15 months. With soaring prices of basic necessities, the risk of entrenched inflation increases.
A Conference Board of Canada poll released this week found that three-quarters of Canadians expect inflation to still be above target in three years. And the Bank of Canada’s own data shows declining confidence in its ability to keep inflation low and stable.
“How do we maintain our credibility? The first thing we do is get inflation back on target and we are absolutely focused on that,” Rogers said.
“It won’t happen overnight,” she added. “But we have made a path and we are at work. »
“A QUITE SERIOUS COMMUNICATION ERROR”
The slow start is partly due to the bank locking itself into forward guidance in July 2020, promising to keep interest rates at low levels until “the economic downturn is absorbed”, which which should take years.
“If you have a mortgage or are planning to make a major purchase … you can be sure rates will be low for a long time,” Macklem said in July 2020.
Sticking to the forward orientation was necessary, Rogers said, because “that’s how we know it will work next time.”
But that tied the bank’s hands and forced it to react more slowly than it normally would as parts of the economy overheated, according to interviews with economists and a former central banker.
Macklem also signaled that he wanted a full recovery in the labor market before raising rates, which was later confirmed when the bank’s policy mandate was renewed in December, creating an even more dovish outlook for rates.
David Dodge, Governor of the Bank of Canada from 2001 to 2008, said Canadians had been led to believe that the central bank was not overly concerned about inflation and would therefore hold interest rates ” virtually zero forever, come hell or high water.”
It was “a pretty serious miscommunication,” Dodge told Reuters.
Dodge and others Reuters spoke to made clear the central bank was right to respond forcefully at the start of the pandemic and said the unprecedented nature of the crisis made outcomes difficult to predict.
“We are very right. We got some things wrong. We’ve been transparent about it,” Rogers said. “Our work relies on our ability to forecast and in this environment, forecasting has been a very big challenge for everyone. »
Trudeau and Finance Minister Chrystia Freeland have defended central bank independence and blamed the spike in prices on global supply chain issues and the unexpected war in Europe.
“Nobody is doing everything right,” a senior government source said. “But what (the Bank of Canada) didn’t understand was that (Vladimir) Putin was going to invade Ukraine. »
Economists agree that the war in Ukraine complicated the situation and pushed inflation up sharply, even though it was already becoming persistent before the invasion. Complicating the situation, the central bank is now raising rates even as the feds continue to roll out stimulus.
Freeland’s office defends the choice, saying this year’s budget is on “a path of rapid fiscal tightening — especially by the standards of our peers,” a department spokeswoman said.
As markets bet on a 75 basis point hike in July, economists say the aggressive tightening risks undermining the bank’s credibility with a public promised cheap money but now facing rising interest rates. debt service costs.
The once-hot Canadian housing market is already showing cracks due to rising interest rates, with sales plummeting and prices down from February’s peak.
And higher rates don’t seem to be helping to slow runaway prices, said Ottawa resident David Strva, adding he wasn’t sure he trusted the Bank of Canada to bring inflation back. to his goal.
“If they just raise interest rates and that’s the main control they have, I’m not sure what it will do,” he said with a shrug. . “Inflation continues to rise. »
One way to regain public trust is to publish the minutes of central bank meetings, said Derek Holt, vice president of financial markets economics at Scotiabank.
“The Bank of Canada says it’s consensus-driven, so if that’s really true in reality, then it should have no problem disclosing how that consensus was reached,” he said.
For its part, the Bank of Canada says that the fact that it makes its decisions by consensus is exactly the reason why it does not need official minutes and that its quarterly statements on monetary policy “provide transparency in the deliberations”.
Rogers said the bank does its best to “present different perspectives” in its speeches and statements.
But so far, he’s done little to appease the critics. Poilievre, a populist and Bitcoin enthusiast, continues to spread the narrative on social media, with tweets and Facebook posts garnering thousands of likes from his half-million followers.
“They did what Trudeau told them: print money for deficits, causing runaway inflation and a dangerous housing bubble,” he wrote in a tweet earlier this month.
Reporting by Julie Gordon and Steve Scherer in OttawaEditing by Denny Thomas and Deepa Babington